SCOTT SIMON, HOST:
The damages caused by LA's wildfires may be the highest in U.S. history. Fires, floods and storms in many parts of the country have been making insurance more expensive and harder to get for years, especially when insurers decide just to get out of risky markets altogether. More than 30 states have programs sometimes known as insurers of the last resort to keep insurance available, but what happens when they begin to run out of money?
Doug Heller is director of insurance at the nonprofit Consumer Federation of America. He joins us now from Los Angeles. Mr. Heller, thanks so much for being with us.
DOUG HELLER: Thanks for having me, Scott.
SIMON: Insurers of the last resort doesn't sound like a promising business plan. How does it work?
HELLER: Well, these programs were developed initially in the 1960s, and they were supposed to be kind of a support for the insurance system where there was a market failure, where the companies in the private sector just didn't feel able or didn't want to serve certain communities, but it was really meant to be a program just to sort out small problems in the market. What we've seen over the last several years here in California, but also around the country, are more and more insurance companies walking away from entire communities and leaving these insurers of last resort to grow and take on more and more risk. And it's really created a fragile system.
SIMON: Well, what happens when - and this might be a situation coming to a head in California - there's just not enough money in that plan to pay out everyone?
HELLER: Historically, the insurance companies themselves - the ones that didn't want to serve the customers, and so they were forced into that last-resort market. The insurance companies themselves would backstop any extra losses to make sure that people did get their claims paid. We have some new rules in California that may allow the insurance companies to actually place an assessment on homeowners throughout the state. It could be that sometime later in the year, every Californian has a homeowners insurance assessment on their premium in which they have to be the backstop rather than the insurance companies themselves. So that still has to play out, and the insurance companies are going to have to seek approval from the insurance commissioner. But of course, that's going to be a shock to people all around the state that they end up having to pick up the pieces for the last resort market having lost too much.
SIMON: Well, and let me pose a question I'm pretty sure will come up - why should a homeowner in an area that's not likely to be hit by wildfires pay more to help people rebuild in an area that is?
HELLER: Well, I think it's going to make people really quite angry, but I also think it's important to think about what insurance is supposed to be. Insurance is supposed to be a way to pool our risk. And what we need is a system where we don't bifurcate the market between the low-risk, who get to go to the private companies, and the high-risk, who are stuck in these last-resort plans. Insurance works better when it's a mix of some high-risk and some moderate and some low-risk. But when we have this system where the insurance companies are totally unwilling to serve communities that are higher risk, that concentration of high-risk in the last-resort plan becomes a burden that we all have to share.
SIMON: I have to ask - I mean, can you imagine a company that would say, look, we're in the insurance business, not in the loss business. And these areas are overwhelmingly vulnerable.
HELLER: Well, the insurance business is the loss business. The whole point of this is that we as homeowners would never be able to rebuild our homes with the cash we have - same with businesses and their properties. And so the insurance system is meant to be there to cover those losses, and we are supposed to pool our money together. But what's happened, I think, is the private sector insurers have decided that they really only wanted the most profitable low-risk business. Now, that may make sense for their business, but it doesn't serve what the insurance system is supposed to do. And I think what we're seeing is that the private sector's approach to property insurance is starting to crack under the weight of the risk from climate change, and the public just can't fill those gaps under the existing structure.
SIMON: Is it wise, is it in the public interest for insurance programs to help to people rebuild homes in areas that are now known to be more vulnerable to fires?
HELLER: I think it's one of the most important questions we have to be asking ourselves these days. We do have to have that conversation, Scott, and we have to think about where we can and can't rebuild. But we have about 3 million American families in these last-resort plans around the country, and we can't simply say to all of them, you're too high-risk; you've got to move. That just won't work. So we have to plan for this rather than what we've unfortunately done, which is simply let the insurance companies walk away from the market and then force the public to pick it all up all at once. And so this is a time for not just reflection, but serious reconsideration of land use and housing all across the country.
SIMON: Doug Heller, director of insurance at the nonprofit Consumer Federation of America. Thanks so much for being with us.
HELLER: Scott, thanks for having me.
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